Demand for municipal bonds is coming from all sizes and shapes of borrowers. Both retail and institutional investors are jumping into the market and are going into individual bonds, mutual funds and exchange-traded funds.
This demand — exacerbated by the lack of tax-exempt supply — pushed the Municipal Market Data triple-A 10-year and triple-A 30-year yields to record lows Tuesday.
Since Oct. 12, when the 10-year muni yield reached 2.58%, yields have fallen 76 basis points to 1.82%, the new all-time low as recorded by MMD. The 30-year yield has fallen 46 basis points since Dec. 1 to the new MMD record low of 3.40%.
Following what has been a month-long trend, munis strengthened Tuesday. Yields on the three-year fell two basis points while yields on the four-year fell three basis points. The five-year and six-year yields were unchanged, but the seven-year yield fell one basis point.
The eight-year and nine-year yields were also unchanged, while the 10-year and 11-year dropped one basis point. The 12-year yield was cut three basis points while yields outside the 13-year all plunged five basis points.
The two-year yield held steady at 0.40%. The 10-year yield closed down one basis point to 1.82%, beating the previous record of 1.83% as recorded by MMD on Dec. 30. The 30-year dropped five basis points to 3.40%, beating the previous record of 3.44% as recorded by MMD on Sept. 23.
Meanwhile, Treasuries were mixed. The short end strengthened, with the two-year yield falling one basis point to 0.25%. The long-end weakened as the benchmark 10-year and the 30-year yields increased two basis points each to 1.98% and 3.04%, respectively.
Helping push yields lower was a small influx of new deals Tuesday that were soaked up by supply-hungry investors.
“It’s nothing short of a bond grab,” a trader in New Mexico said. “That’s what was expected with money being generated internally with calls and coupons being paid and a slowdown in issuance.”
Both retail and institutional buyers are participating in the market, he said. “Institutions are getting coupons paid and bonds called and trying to get that money reinvested.”
For the retail side, muni bond mutual funds are seeing inflows. “Cash flows are picking up so there is more pressure on managers to get that money reinvested,” he said.
While individual bonds look expensive, muni bond ETFs appear to be just as pricey. “The market is extremely expensive right now,” the trader said, citing the
iShares S&P National AMT-Free Municipal Bond Fund — ticker MUB.
“The indicated yield on that ETF is 2.91% and as of last night, is trading at 2.50% premium to NAV value,” he said. “So investors are willing to buy that fund and in effect on the first year they get 41 basis points of income. In my mind, that’s a good measure of how expensive the muni market is right now.”
In the primary market, JPMorgan took indications of interest for $150.6 million of Nashua, N.H., taxable general obligation bonds. The credit is rated Aa2 by Moody’s Investors Service and AAA by Fitch Ratings. Maturities ranged from 2013 to 2042. The bonds were priced to yield between 75 basis points and 180 basis points over the comparable Treasury yield.
Morgan Stanley took indications of interest on $108 million of Virginia Port Authority taxable commonwealth port fund revenue refunding bonds. The bonds are rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch. Maturities ranged from 2013 to 2027. The bonds were priced to yield between 60 basis points and 185 basis points above the comparable Treasury yield.
In the competitive market Tuesday, Bank of America Merrill Lynch won the bid for $243.8 million of Florida Department of Transportation GOs. The credit is rated Aa1 by Moody’s and AAA by Standard & Poor’s and Fitch. Yields ranged from 1.27% with a 5% coupon in 2018 to 2.44% with a 5% coupon in 2024. Credits maturing from 2012 to 2017, 2020, 2021, and from 2025 to 2041 were sold but not available. The bonds are callable at par in 2021.
Barclays Capital won the bid for $230 million of Colorado short-term notes, rated M1G-1 by Moody’s and SP-1-plus by S&P. PNC Capital Markets won the bid for $175 million of Allegheny County, Pa., short-term notes, rated SP-1-plus by Standard & Poor’s.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board show firming. A dealer sold to a customer New York State Housing Finance Agency 5s of 2036 at 2.82%, 25 basis points lower than where they traded last week. Another dealer sold to a customer California Statewide Communities Development Authority 5s of 2041 at 4.38%, 12 basis points lower than where they traded the week before.
Bonds from an interdealer trade of Washington 5s of 2025 yielded 2.55%, 12 basis points lower than where they traded last week. Bonds from another interdealer trade of New York City Industrial Development Agency 5s of 2046 yielded 6.04%, six basis points lower than where they traded the previous week.
The health care sector may require more attention in 2012 than in the past, according to John Hallacy, municipal research strategist at Bank of America Merrill. Changes in the sector could affect its bonds, such as the Supreme Court’s decision on the Affordable Care Act.
Hallacy expects health care bond issuance to be no lower than the $10 billion issued in 2011, but no higher than the $12 billion issued in 2010.
“Uncertainty as to what the reimbursement landscape will look like will mean that much of this volume would be postponed to the second half of the year, after the court’s decision,” Hallacy said.
